More time for business
Tax simplification for small business
A Government discussion document
Hon Dr Michael CullenHon Paul SwainJohn Wright MP
Minister of FinanceAssociate Minister of Parliamentary Under-Secretary
Minister of RevenueFinance and Revenue to the Minister of Revenue
First published in May 2001 by the Policy Advice Division of the Inland Revenue Department,
P O Box 2198, Wellington.
More time for business – tax simplification for small business; A Government discussion document.
ISBN 0-478-10342-5
PREFACE
This is the first in a series of Government discussion documents that put forward proposals for simplifying the tax system.
More time for business looks at tax simplification from the point of view of small businesses, addressing many of their concerns about the requirements of the tax system. The Government is serious about tackling these concerns, so that small-business people will have more time for doing what they do best – running their businesses.
The focus of the proposals is on reducing risk. Most small businesses attempt to meet their tax obligations, but the complexity of tax rules, however, raises the fear that they may make costly mistakes. This is a real burden on small businesses.
Reducing tax risk is a difficult and complex process, one that requires continuous effort. Earlier tax simplification changes have made progress, but more needs to be done, especially for small businesses. In developing the proposals contained in this discussion document, the Government has created an opportunity for the first major reductions in the tax-related compliance burden on small business in many years.
The discussion document raises a number of ideas that need to be explored. To make the most of this opportunity, we need the contributions of businesses, their tax advisers and other interested parties. We welcome your submissions.
Hon Dr Michael CullenHon Paul SwainJohn Wright MP
Minister of FinanceAssociate Minister of Parliamentary Under-Secretary
Minister of RevenueFinance and Revenue to the Minister of Revenue
TABLE OF CONTENTS
PREFACE
Chapter 1 Introduction
Benefits of tax simplification
Application date of proposals
Key questions
Submissions
Chapter 2 TAX SIMPLIFICATION PAST AND FUTURE
Tax simplification and the Government’s tax policy work programme
A new type of tax simplification
The Government’s business compliance cost reduction programme
Recent reviews of the tax system
Tax simplification measures already implemented
Outstanding simplification issues
Tax simplification in other countries
Chapter 3 REDUCING THE RISKS OF the tax system
Reducing taxpayer risk
Simplifying contact with Inland Revenue
Chapter 4 Simplifying provisional tax
Options for change
Chapter 5 reducing paye obligations
Concerns about PAYE
PAYE by intermediaries
Penalties and interest
Future possibilities
Chapter 6 Reducing end-of-year tax adjustments
Going from cash surplus to tax profit
Trading stock valuations
Adjustments for debtors and creditors
Depreciation
Chapter 7 BUILDING on the tax simplification reforms for wage and SALARY earners
Extending non-filing for wage and salary earners
Simplifying family assistance
Chapter 8 Simplifying other areas of tax
Non-resident contractors’ withholding tax rules
Resident withholding tax certificates
Imputation credit account refund process
Chapter 9 THE ROLE OF information TECHNOLOGY
Recent initiatives
Future opportunities
Chapter 10 Inland Revenue’s administrative improvements
Administrative strategy for reducing compliance costs
Changes to the way that businesses are supported
Appendix 1Tax simplification in other countries
Appendix 2Use-of-money interest compared with commercial rates
Appendix 3Survey of employers on the tax simplification reforms for wage and
salary earners
Chapter 1Introduction
1.1Many small businesses struggle to comply with the increasingly complex set of tax laws to which they are subject. As a consequence of that complexity, the costs of compliance and the risks associated with involuntary non-compliance have increased greatly.
1.2The Government is aware of small businesses’ concerns about the requirements of the tax system. These concerns include difficulties matching flows of income to tax payments, difficulties communicating with and providing information to Inland Revenue, and potential exposure to penalties and use-of-money interest.
1.3The focus of this discussion document is on reducing the stress, uncertainty and risk that these concerns place on small businesses. It is also aimed at reducing the need for all businesses, irrespective of their size, to communicate with Inland Revenue.
1.4If a business does need to contact Inland Revenue, the use of information technology, backed up by improved Inland Revenue assistance, will play an important role in helping businesses meet their obligations. As a result, businesses will be able to free up resources which can be better directed to increasing productivity and effectiveness.
1.5Reducing compliance costs is a complex process. It requires a focused, continuous effort and a genuine commitment to simplifying the tax system.
1.6In presenting the measures contained in this discussion document, the Government is endeavouring to move a step closer to the elusive goal of true tax simplification. We welcome the views of taxpayers, their advisers and other interested parties on how we can best achieve this.
1.7This document is the first of four initiatives by the Government to reduce tax compliance costs. Others to be released within the next few months include:
- a discussion document on the income tax treatment of Mäori organisations and businesses;
- a draft of the rewrite of Parts C, D and E of the Income Tax Act 1994; and
- a discussion document outlining the results of the post-implementation review of the compliance and penalty legislation.
Benefits of tax simplification
1.8The main benefits expected to arise from the measures outlined in this discussion document include better alignment of tax payments with cash-flow and reduced exposure to penalties and use-of-money interest. The need for taxpayers to contact Inland Revenue is also expected to lessen. The proposals will simplify some tax calculations, and reduce the amount of information that businesses have to provide to Inland Revenue.
1.9Creating these benefits necessarily involves reconsidering some of the trade-offs in the tax system between administration costs, efficiency costs, compliance costs, and the cash-flow benefits businesses have from retaining tax payments. For example, to reduce the risks that taxpayers face from not making a payment on time it will be necessary for them to lose some of the benefits of retaining tax payments.
1.10Similarly, options that give businesses more flexibility in how they calculate or pay tax necessarily reduce the simplicity of the tax system, and taxpayers will incur costs to work out which option gives them the best result.
1.11Although focused on reducing the costs associated with provisional tax, the proposals in this discussion document cover a broad range of tax issues.
SUMMARY OF PROPOSALS
Simplifying provisional tax (chapter 4)
A provisional tax system based on three equal payments spaced evenly throughout the year does not suit some small businesses whose income fluctuates during the year or for whom it is difficult to estimate how much income they will earn. Two proposals are aimed at helping small businesses overcome these problems by allowing them to pay tax as income is earned, thereby approximating cash-flow better than the current provisional tax rules do. They are voluntary alternatives to the current provisional tax system. Other proposals are aimed at reducing interest costs associated with the current system.
Withholding tax on business income
Banks would automatically deduct a proportion of all deposits into a business’s bank account and send those payments to Inland Revenue as instalments of income tax. The business would be required to deposit all its income into that account. This system is similar to the way that employers deduct PAYE from employees, except that the rate of deduction would be selected by the business to accommodate its individual circumstances.
Paying provisional tax with GST
Small businesses that file GST on a one-monthly or two-monthly basis would pay a proportion of their GST sales and income along with their GST as instalments of income tax. It would be up to the business to decide what proportion of its sales and income it pays as income tax.
It would not be necessary to send any other payments to Inland Revenue during the year under the withholding tax option or the GST option. The square-up of the year’s income tax liability would be done after the end-of-year tax return is filed. Interest would not be charged or paid on the difference between the amount paid during the year and the actual income tax liability. Businesses that did not come reasonably close to paying the right amount of tax during the year would not be able to use these options in following years.
Pooling provisional tax
Businesses would be allowed to pool their provisional tax with that of other businesses, and underpayments could be offset by overpayments within the pool. The arrangement would need to be made through an intermediary who would also arrange for the businesses to be charged or compensated for the offset. This option would mean that interest paid to or paid by businesses would be more favourable than the use-of-money interest rates applied by Inland Revenue.
Removing interest
No interest would be charged or paid to taxpayers who pay provisional tax based on last year’s tax liability plus 5% if their payments during the year meet 90% of their income tax liability for that year.
Reducing PAYE obligations (chapter 5)
Employers who use an intermediary such as a recognised payroll firm to calculate and pay PAYE would have their exposure to penalties and interest largely removed. There is an option under this proposal for employers who wish to delegate only the calculation functions and prefer not to use an intermediary to pay the tax. Those employers would still be responsible for making payments on time, so would still be exposed to late payment penalties and interest.
Reducing end-of-year tax adjustments (chapter 6)
The Government has considered whether the costs associated with end-of-year income tax calculations can be reduced.
Trading stock
Small businesses that can reasonably estimate that they have less than $5,000 worth of trading stock at the end of the year would not be required to value that stock nor include any change in the value of that stock in their calculation of income.
Depreciation
Several options to reduce compliance costs associated with depreciation are put forward. They would:
- provide businesses with easy to use Internet-based tools that calculate depreciation deductions accurately and with certainty;
- increase the value of individual assets that can be pooled for depreciation from the current threshold of $2,000; and
- reduce the restrictions on immediate deductibility for assets purchased from the same supplier at the same time.
Building on the tax simplification reforms for wage and salary earners
(chapter 7)
The benefits of the tax reforms that removed the need for 1.2 million wage and salary earners to file tax returns would be extended to more taxpayers.
Reducing filing for beneficiaries of trusts
Beneficiaries of trusts are currently required to file a tax return regardless of how much tax has been paid on their behalf. The proposal is that beneficiaries of trusts would not be required to file a tax return if enough tax has been paid on their behalf. This proposal has the potential to reduce filing requirements for around 57,000 beneficiaries of trusts.
Voluntary withholding on non-cash employment income
Receipt of non-cash income from employment, such as share benefits, raises compliance costs associated with filing returns, and provisional tax obligations for taxpayers who are essentially wage and salary earners. It is proposed to give employers the option of withholding tax on this type of income through the PAYE system. Doing so would mean that tax would be paid as income is earned, and no residual obligations to file tax returns or pay provisional tax arise.
Reducing the need to file tax returns on behalf of deceased taxpayers
Income tax returns must be filed on behalf of deceased taxpayers who if alive would have met the criteria for non-filing. The proposal is to include executors and administrators acting on behalf of a deceased taxpayer’s estate amongst those not required to file a tax return. Doing so would reduce both the compliance costs associated with filing as well as stress on the families of deceased taxpayers who may otherwise have to wait unnecessarily for an estate to be wound up.
Minimum threshold for filing
Earning any income that has not had tax withheld on it, regardless of how small it is, raises the obligation to file a tax return. It is proposed to introduce a $200 threshold for income from which tax has not been withheld, before a tax return has to be filed. Although it would reduce compliance costs for those who do file returns for small amounts of income, more importantly, it would remove exposure to penalties and interest for taxpayers who choose not to file returns because the compliance costs of filing a return are disproportionate to the income.
Simplifying family assistance
Family tax credits would be paid to the principal caregiver instead of both spouses. This would reduce filing requirements and the likelihood of families inadvertently getting into debt with family assistance.
The calculation of family assistance would be simplified by removing most of the complex adjustments that are currently made. This would make it easier to determine entitlement, and it would also reduce the risk of debt. These changes are generally expected to increase entitlement to family assistance, although it may reduce for some families or change within a given period.
Simplifying other areas of tax (chapter 8)
Non-resident contractors’ withholding tax (NRCWT)
The Government proposes to remove the need for contractors from countries with whom New Zealand has a double tax agreement to apply for a certificate of exemption from tax in New Zealand if they are here for less than 62 days. Although entitled to an exemption, some contractors and their employers do not apply because it is a burden to do so. Consequently, they face exposure to penalties.
Although a non-resident contractor may not initially be subject to NRCWT, later events could result in a tax liability arising. The proposal is to prevent penalties from applying if employers exercise reasonable care in determining that the non-resident contractor was not initially subject to NRCWT, and it subsequently turned out that he or she was.
Submissions are sought on whether NRCWT should be assessed by employers instead of Inland Revenue.
Resident withholding tax (RWT)
Banks, financial institutions and other payers of interest are required to give RWT information in the form of a certificate to earners of interest. It is proposed to change the legislative requirements on how the information in the certificates can be communicated, to keep up to date with technological changes in the banking industry. Changes could include putting the information on bank statements, sending it by e-mail, or making it available on bank web sites.
Banks do not automatically send deduction certificates to savers who earn less than $20 a year in interest. It is proposed to increase that threshold to $50.
Imputation credit accounts (ICAs)
Companies applying for a refund of ICA credits are sometimes required to file an interim IR4J return, despite already providing the necessary information in other returns. This requirement would be removed, thereby making the refund process faster and less costly.
Role of information technology (chapter 9)
Information technology provides new opportunities for tax simplification in areas such as the calculation of tax owing, filing tax returns and making payments. Initiatives are currently under way to improve taxpayer access to information, improve the way Inland Revenue uses information, increase the flexibility with which payments can be made, and increase electronic filing of returns.
Inland Revenue is also developing a long-term strategy to improve taxpayer services that can be provided via the Internet. It may also be possible to use electronic technology to reduce the risks that taxpayers face. One way of doing so could be to provide taxpayers with on-line tools to calculate tax. Inland Revenue would be responsible for the calculation and taxpayers would be responsible for providing accurate source data. Another way of reducing risk for taxpayers is to automatically remind them of upcoming due dates. It may also be possible to improve communication with Inland Revenue by making both tax technical information and personal tax information easier to obtain. Improvements in information technology could also allow Inland Revenue to customise its services and the requirements it places on taxpayers. For example, in the future the information sent to businesses could be better tailored to the individual needs of the business, and returns could be made at frequencies more convenient than allowed for by the current rules.
Inland Revenue’s administrative improvements (chapter 10)
As part of Inland Revenue’s long-term and continuing commitment to simplifying the tax system and reducing compliance costs, it is proposed to:
- extend the free small business advisory service by providing information and support to businesses that will benefit most and at a time that is most useful;
- encourage more employers to use the recently enhanced electronic filing facilities;
- improve the level of telephone services by making more resources available to answer phones at critical times and improve the capacity to forecast and plan for peak demand as well as to consider what the optimum design for call management should be; and
- improve the layout and content of forms, statements, and brochures produced by Inland Revenue.
Application date of proposals
1.12If the proposals set out here receive support, the earliest they could apply would be the 2002-2003 income year.